As the overall earnings outlook looks dim, the investment community grows increasingly concerned about valuations. At the end of 2019, the S&P 500’s price to sales (P/S) ratio was measured at 2.30. This means that its P/S ratio is now above the “dot-com” bubble levels. According to the latest readings, the index’s P/S ratio has climbed even further to 2.42 as of February 2020.
With the bull market closing in on its eleventh anniversary, investors are looking to be more selective with their investment decisions. As a result, value and growth-at-a-reasonable-price (GARP) equity strategies have started to come back into the spotlight.
One GARP-focused opportunity to keep an eye on is Mohawk Group Holdings, Inc. (NASDAQ: MWK), which is currently trading at a discount to its sales compared to the S&P 500 and its overall industry average.
Mohawk Group CEO: “Imagine if a Unilever and a Google had a Child, It Would Be Mohawk”
Mohawk Group Holdings, Inc. is a technology-focused consumer products company, which utilizes machine learning, data analysis, and natural language processing to effectively guide its design, development, marketing, and sale of products that are in high-demand from consumers.
MWK is not your typical CPG company though. The company was founded around the basis that if a company entered the CPG arena today, it would be heavily focused on utilizing advanced technologies like machine learning and artificial intelligence. Mohawk Group CEO Yaniv Sarig describes the company as “Imagine if a Unilever and a Google had a child, it would be Mohawk.” This is a testament to how data analytics can make CPG more efficient and growth-focused.
Through Mohawk’s proprietary next-generation e-commerce platform, AI Mohawk E-commerce Engine (AIMEE), the company can crunch through massive amounts of data points. This helps the company predict market trends, measure consumer sentiment, manage inventory, identify emerging product opportunities, and more.
Once a product opportunity is located, Mohawk works with its manufacturing partners to “implement an agile and iterative methodology allowing us to launch new products within 6-8 months,” according to the company. Furthermore, Mohawk’s optimization of its supply chain helps keep prices competitive and enticing to consumers.
The company sells its consumer products across multiple e-commerce channels, including Amazon.com, Inc. (NASDAQ: AMZN) and Walmart, Inc. (NYSE: WMT). Mohawk launched a total of 32 products in 2019, including 20 during the second half of the year. Management has since estimated a total launch of 20 new products during the first quarter 2020.
Overall, Mohawk currently sells over 250 SKUs. Since 2015, Mohawk Group has seen year-over-year net revenue growth of around 57%.
MWK: Price to Sales Ratio of 0.66, Estimates Strong Growth in Q4 & FY 2019 Net Revenues
Mohawk has demonstrated how advanced technology can help drive growth in the CPG e-commerce space. Sales growth continues to be impressive. In January 2020, the company released preliminary fourth-quarter and full-year 2019 net revenues.
For the fourth quarter, the company is estimating net revenues will grow to between $25-26 million. This would represent growth between 27-32% on a year-over-year basis. The full-year 2019 preliminary results look even more enticing: est. $114-115 million in net sales. These estimates represent year-over-year growth of 56-57%.
“It was a busy and productive finish to the year as we launched a record 18 new products during the fourth quarter, bringing our full-year total to a record 32,” said Mohawk’s chief executive officer, Yaniv Sarig. “Importantly, we’ve continued to diversify our product categories, as 14 of our 18 fourth-quarter product introductions, and 24 of our 32 new products in 2019, were non-environmental products. The investments we’ve made in people and resources over the past 12 months, primarily in areas such as quality control and product procurement, have significantly strengthened our foundation for growth. Looking ahead, we are confident that we can further accelerate our annual output and plan to double the amount of new product launches in 2020 while continuing on the pathway to profitability.”
Mohawk’s price to sales ratio is currently 0.66, which is undervalued compared to the S&P 500’s P/S 2.42 and even the “personal & household products” industry average of 3.48, according to Csimarket.com. At a time when the S&P 500’s P/S ratio is storming to levels not seen in decades, MWK is a reminder that there are still potential opportunities out there. All eyes will be on the final Q4 and FY 2019 earnings results, which are due out March 5th after the market close.
Analysts Coverage: 3 “Buy” Ratings and an Average Target Price of over $10
Since its IPO in 2019, Mohawk has received three analyst coverage initiations. Overall, all three firms rate the company as a “buy” and with an average target price of $10.33. This implies a potential upside of 156.97% from its current price of $4.02.
Alliance Global Partners has a buy rating with a target price of $12. National Securities has MWK with a buy rating and a target price of $10. DA Davidson initiated coverage on December 20, 2019, with a buy and a target price of $9.
Overall, Mohawk Group is currently a GARP stock, as its sales growth continues to impress. With the upcoming earnings release in early March, investors will be watching eagerly to see just how good sales growth was in 2019. After launching a record 18 new products during the fourth quarter of 2019, sales growth should continue to expand in the coming quarters.
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